China's Big Bid For Germany's Industry 4.0 Technology

Midea, the Chinese household appliances (“white goods”) manufacturer just made what analysts called an ‘incredibly high’ bid for German robot maker Kuka. This acquisition would take the Chinese investor right to the heart of Industry 4.0: Kuka is a leading manufacturer of multifunctional robots that represent an important building block for enterprises upgrading their factories with full automation, the latest human-machine interface functionality, and machine-to-machine communication. Midea want a 30% stake in Kuka and have offered €115 per share. Kuka’s shares traded at €84 the day before and had already increased 60% since the beginning of the year. This offer values Kuka at €4.6 billion, which means Midea’s 30% stake would be worth €1.4 billion – on par with Beijing Enterprise’s February 2016 takeover of recycling company EEW which was the largest Chinese acquisition of a German firm to-date.

Midea’s takeover bid underscores Chinese interest in German Industry 4.0 technology; in January 2016, ChemChina paid €925 million for Munich-based KraussMaffei machine tools, in part because of their advances into Industry 4.0. Recent smaller Chinese acquisitions in the German machine tool industry, which include the partial acquisitions of H.Stoll by the ShangGong Group and of Manz by the Shanghai Electric Group are, in part, motivated by the objective to partake in the latest Industry 4.0 developments.

Why are Chinese so keen on Industry 4.0? China and Germany are the world’s industrial powerhouses, but with some differences. While China’s industry has grown largely on the back of low cost labor, German industry has been pushed into advanced automation by high labor costs. Now, China is facing radical demographic changes, and ‘cheap and hardworking’ young workers are no longer readily available. Thus, industry must change and develop new and less labor intensive manufacturing practices, and that requires more automated machines and robots. The Chinese government encourages this shift; its China 2025 plan envisages the country as the global manufacturing innovation center and prioritizes the development of intelligent manufacturing.

What are the key challenges Chinese firms face to adopt Industry 4.0? The first is that many manufacturers are still operating in the age of Industry 2.0 – the labor intensive phase. Industry 4.0 is about connected machines that generate huge volumes of data that are analyzed and exploited to not only make machines more efficient, but to coordinate entire factories and value chains. Skipping an entire stage of industrial development – from Industry 2.0 to Industry 4.0 – may sound attractive, but requires a hard climb; it would mean introducing far more automated machines along with new forms of data-driven coordination. Critically, this requires new sorts of skills on the factory floor: people who can operate the complex machines and automated processes. In reality, many discussions I have with people in China are mainly about automation of production, rather than with integration of factories and value chains using Big Data analytics. This is where Kuka — one of the world’s leading robot manufacturers — comes in. Its products could help China’s manufacturers replace labor on the production line.

Should German industry be concerned? Industry 4.0 is built on an industry ecosystem involving many large and mid-size companies in Germany, including some that are owned by foreign investors. However, integration across organizational boundaries represents challenges in itself because Industry 4.0 involves sharing of large volumes of data between related enterprises. German companies are still working on how to create appropriate platforms and security procedures for inter-firm data interfaces. If a central player within this ecosystem were to drop out, or no longer be a trusted member of the community, this could theoretically be a concern. Kuka is a valuable partner in Industry 4.0 but, as far as I am aware, not so central that others should be concerned. At this stage, however, if there are further aggressive acquisitions, public opinion might swing. If German industry believe that Kuka should stay in German hands, then we should see a bidding war as German investors make a counter-bid for Kuka.

Would the competition authorities be concerned? Possibly. Chinese companies are far more vertically and horizontally integrated than typical European companies, including competitors of Midea in the white goods industry, such as Electrolux (Sweden), Bosch-Siemens (Germany) or Arcelik (owner of Beko, from Turkey). Imagine that one of these global players wants to build a new plant based on the latest Industry 4.0 technology: Would they be comfortable contracting a company that is owned by their competitor, and that presumably shares sensitive data with their owner? Perhaps not. In European competition law, there is a criterion known as vertical foreclosure: if a merger gives a company control over its competitors’ critical inputs, that could be considered as an obstacle to competition. Whether these conditions would apply to robots is not clear, and Kuka does not have a dominant position in the market. Thus, intervention of the competition authorities would seem unlikely.

Why only 30%, and why hostile? It is rather unusual to make an unsolicited bid — popularly known as ‘hostile’ bid — for only a minority stake in a company. Midea has built up an equity stake of over 10% since the beginning of the year, and according to its press release does not intend to acquire more than a 30% stake. Presumably, this self-constraint is intended to reassure Kuka’s business partners, whose trust in both the quality of the brand and the independence of the operations is critical for their business partnerships (see above). However, a 30% equity stake in a listed company is rarely stable. We do not need to look far for examples of gradually increasing equity stakes of Chinese investors. There are two recent ones in the German machine tool industry: Weichai Power is now the largest shareholder in Kion, and AVIC holds majority control of KHD Humboldt Wedag. In both cases — to the best of my knowledge — the entry of the Chinese investors was a friendly acquisition. However, Midea seems to play a different game. I do not know what their long-term game plan really is. However, investors and others with an interest in the industry will want to know.